Investors targeting Africa are broadening their horizons in their search for yield as sluggish growth and policy uncertainty in Nigeria and South Africa, the continent’s biggest economies, weigh on returns.

Ivory Coast, Senegal, Ghana, Rwanda and Ethiopia are among countries featuring on the radar screens of investors attending the World Economic Forum’s annual gathering of the continent’s business and political leaders being held in Durban on South Africa’s east coast.

All five economies should grow at more than the double the sub-Saharan region’s average forecast rate of 2.6 percent this year, the International Monetary Fund said last month. It expects both Nigeria and South Africa to expand 0.8 percent.  

“There is a more nuanced story in Africa,” Razia Khan, Standard Chartered Plc’s head of Africa macro research, said in an interview at the forum. “There are pockets of strength and turnaround. Local factors matter much more than they did in the past.”

Senegal and Ghana are set to benefit from recent oil discoveries. Both their governments, along with those of Rwanda, Ivory Coast and Ethiopia, have also implemented policy changes to attract investment and made it easier for businesses to operate.

Africa attracted $94.1 billion of foreign direct investment last year, up from $71.3 billion the year before, accounting firm EY said in its 2017 Africa Attractiveness report, released on Wednesday. South Africa, Egypt, Morocco, Kenya and Nigeria accounted for 58 percent of the foreign direct investment projects.

Capital Inflows

Fewer than 10 of Africa’s 54 nations probably have sufficiently developed and big-enough economies with the potential to attract significant capital flows and transactions, said Martin Kingston, the chief executive officer of N.M. Rothschild & Sons Ltd. in South Africa. 

“We all recognize that we need to be very selective about the markets we focus on and the size of those markets,” he said. “We have seen pockets of real opportunity but also seen substantial concerns about the short-term direction and the ability for policy makers to give effect to the policies that they’ve articulated.”

South Africa’s investment appeal has been dented by an intensifying battle for control of the ruling African National Congress and President Jacob Zuma’s March 31 decision to fire Pravin Gordhan as his finance minister -- a move that prompted S&P Global Ratings and Fitch Ratings Ltd. to downgrade the nation’s credit rating to junk.

Nazmeera Moola, co-head of fixed income at Cape Town-based Investec Asset Management, sees South Africa’s economy growing 1 percent or less this year and doesn’t anticipate a significant improvement under the current political leadership. The ANC is due to hold internal elections at a Dec. 16-20 conference in Johannesburg.

‘Bare Minimum’

“Business is going to be doing the bare minimum in terms of investment until there is clarity in terms of the political outlook,” Moola said in an interview in Durban. “Given the improvement we’ve seen in commodity prices, given the improvement we’ve seen in exports, we really should see investment growing and I fear that’s not going to happen.”

While Nigeria, which has Africa’s biggest population and vies with Angola as the continent’s largest oil producer, was an investor darling when crude prices were high, it fell out of favor as commodity prices slumped and the economy contracted last year. The nation’s appeal has been further eroded by the central bank’s restriction of access to foreign exchange and its intervention in determining the exchange rate.

“There is a fairly long road ahead for Nigeria to reform its institutions, get itself back on its feet, broaden the economy to the extent that its no longer so reliant on oil,” said Chris Newson, Investec Asset Management’s director of private markets. “There are aspects that are looking a bit more encouraging but I wouldn’t be unrealistic. It’s going to take a long time for this to really start moving.”

While investors are seeking opportunities in Nigeria, Kenya and especially Ethiopia, French West Africa is a “region of interest,” particularly Ivory Coast and Senegal, Gary Senior, a corporate partner at Baker & McKenzie LLP’s London office, said in Durban. It was the top law firm for developing market M&A last year in terms of deal count, according to data compiled by Bloomberg.

To realize their full investment and growth potential, African economies need a sustained period of structural transformation, according to Khan.

“What you really need is a period of several decades where 6 to 7 percent growth can be sustained,” she said. “We are not seeing that anywhere in the region yet. ”